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Auto dealers rethinking how they pay their salespeople

As weak new-vehicle sales combine with dramatically shrunken dealer profit margins on new cars, many dealers are trying new ways to pay their salespeople. The traditional straight commission of 20 percent of gross profit has so squeezed salespeople that dealers fear a wave of departures. A common switch: Pay a base salary plus commission. An Automotive News informal survey of 235 retailers suggests that about one in three dealers changed his pay plan in the past two years. In a separate response, one in three said he is considering tweaking his pay formula. "Traditional pay plans are being challenged, tweaked and reinvented to do one important thing: keep the sales position a true profession as opposed to a job and the associated turnover," says Paul Stowe, who has been in the auto industry 40 years and is now director of the consulting firm NCM Associates in Overland Park, Kan. In the past decade, even as vehicle prices rose, the average gross profit on a new vehicle, including finance and insurance, dropped from about $1,550 to about $1,300, according to the National Automobile Dealers Association. Auto retailers say they're slowly losing experienced salespeople to other industries. While high unemployment is now causing many salespeople to cling to their jobs, dealers fear a mass exodus of sales talent if the job market improves. As a result, dealers are sweetening pay plans. Some auto retailers have stopped paying salespeople a percentage of gross profit. The trick is to ensure that salespeople make a living without giving away vehicles. "We give them a small salary plus a percentage of the gross profit — 20 percent on new cars and 25 percent on used cars," says Tim Parker, co-owner of Parker Chevrolet in Champlain, N.Y. Another recent change to Parker's pay plan occurred after the finance and insurance manager left in November to work for a Toyota store. Parker decided against replacing him. Instead, he has his five-member sales force sell finance and aftermarket insurance products. Other dealers are also merging the F&I role into the sales position to fatten pay, or at least they're splitting the F&I income between the F&I and sales professionals. Some dealers are increasing the small F&I commission they already pay salespeople. Making sacrifices

Buddy Stasney, owner of Buddy Stasney's Buick-GMC in Lincolnton, N.C., has paid his salespeople a salary plus commission. But now he offers as an option a straight salary to salespeople who average at least eight vehicles a month. To sweeten compensation, Stasney recently added a retention bonus of $25 per sale on up to nine cars a month. He pays $50 per unit retroactively once a salesperson sells 10 cars. The bonus accumulates and is paid in equal chunks in December, April and July, so salespeople have extra money for Christmas, income taxes and summer vacation. Stasney says he can't afford to lose good salespeople. "The younger generation that's coming into dealerships isn't gearheads buying cars — they're geeks buying technical stuff," he explains. "It's a different era. They know more about the cars than we do. We need salespeople really on their game." Dealers are resorting to sacrifices to keep the sales force intact. Some, for example, are eliminating the conventional "pack," a lot fee that many dealers subtract from the gross profit before calculating a salesperson's commission, says Paul Faletti Jr., CEO of NCM Associates. Others interviewed by Automotive News say they are even paying salespeople some of the holdback amount that factories set aside from the vehicle invoice price. The holdback is designed to help cover vehicle carrying costs such as the interest on inventory financing. Changes under wayJoe Verde of San Juan Capistrano, Calif., started selling cars in 1973 and has spent the past 25 years as a dealer consultant. Verde says many dealers are paying a commission plus a volume bonus. And during the recession, he has seen more dealers start paying a base salary. "I have seen every kind of pay plan," Verde says. "I see people do well on salaries and people do well on commissions. But the most effective plan for a self-motivated salesperson is a commission plan." Verde warns that dealers shifting to paying a salary also had better set a minimum sales requirement, or their sales will suffer. In the survey, only 21 percent of dealers said they paid salespeople a straight commission on the gross profit. Forty-one percent said a commission on gross profit is just one component of pay. Many said they pay salespeople higher percentages of gross profits for achieving volume targets. The most common bonuses are linked to volume, customer satisfaction scores and repeat business. The numbers suggest an about-face on the traditional sales commission on gross profit. Though about half said the commission protects profits, just as many said it should be only a part of a salesperson's pay.

Shrinking grossesDealers began tinkering with the commission on gross profit over the past decade as Internet shopping became prevalent. "Everyone puts on their Web site how cheap they can sell these cars. It's a race to the bottom," says veteran salesman Mike Smith, who sells luxury vehicles for Smith Cars in Charleston, W.Va. "We can't make any gross. People start negotiating at invoice, so there is not any commission anymore." Smith says he is paid 15 to 20 percent of the gross profit, depending on the vehicle make. If he reaches 12 units sold, the commission for all units goes to 23 percent. "It's hard to do every month," he says. "Last year, I sold 120 cars and made about $71,000." Smith is doing much better than the typical car salesperson. The federal Bureau of Labor Statistics reported in May 2009 that the mean annual wage of a salesperson was $42,970, down about 1 percent from 2003. But during the same period, inflation in the United States was about 17 percent, using an inflation calculator on the Web site inflationdata.com. Guarantees and minisIn car sales, a "mini" isn't just the name of a vehicle brand. It also refers to a minimum commission. More dealers are paying minis to guarantee that their sales force makes an income when vehicle sales are down and gross profits are thin, says Faletti of NCM, which boasts hundreds of dealer clients. Ron Morehead Jr., general manager of Honda of Kingston in Kingston, N.Y., pays a mini of $100 per deal. For a salesperson to earn more than a $100 commission, the gross profit on the transaction must be at least $500 above the invoice price. But Morehead isn't happy with minimal profits, so he entices the sales force to negotiate higher grosses by offering special monthly prizes. For example, for the vehicle that fetches the top gross profit — including the front-end sale of the vehicle as well as the back-end sale of F&I products — he pays an extra $250. For the top gross profit on a spot delivery — a vehicle the customer agrees to buy on the spot — Morehead pays $150. Parker, the New York state Chevrolet dealer, guarantees salespeople a minimum income of $150 a week. "But here's another guarantee," he says wryly. "If they rely on that, they won't sell cars very long." From Automotive News